What are “BioBucks”?

A few key takeaways

• ‘Biobucks’ or ‘biodollars’ are a term used by the biopharma industry to describe the potential total value of a deal or partnership, including both upfront payments and future milestone payments. They represent the maximum possibly pay-out of a deal if all development, regulatory, and commercial milestones are met.
• The full biobucks value is often unlikely to be realized, as it assumes perfect success at every stage of development and commercialization. Therefore some argue that biobucks can be misleading, as they may overstate the realistic value of a deal.

The articles

Milestone payments in biopharma: negotiating an equitable value allocation

Development and regulatory milestone payments are a key element of many biopharma deals. This article analyses some of the trends involving these payments over the last decade.

Mark Edwards, May 29, 2019

At the core of every biopharma deal is the question of how to assign value fairly to assets whose future success or failure is often very challenging to predict. Consequently, strategies have been adopted that address this challenge by staggering payments based on future out- comes. Deals often involve some combination of an upfront payment that is made immediately, development or regulatory (DR) milestone payments that are paid once defined goals in the development of assets are achieved and royalty payments once a product resulting from a deal is marketed.

DR milestone payments are very important in the allocation of value in biopharma alliances because most alliances do not result in commercial products owing to failure at some point, but do achieve one or more DR milestones. Conceptually, it is useful to think of DR milestone payments as upfront payments that are escrowed by the licensee of the asset such as a research and development (R&D) program for a drug until achievement of the associated milestone event, and are then released to the asset’s licensor. This enables risk and value to be shared between each party. For example, although a licensor may be confident that the R&D program will commence phase 3 trials some- day, there is often a significant risk of failure. The licensee can mitigate this by holding back a substantial portion of the total agreed payment until phase 3 trials actually commence.

To help understand how DR payments are used, Bioscience Advisors has undertaken a comparative analysis of such payments for bio- pharma alliances over the past decade, which it presents key findings from here. Details of the dataset and analysis methods are described in Box 1.

Historical context of milestone payments

From the early 1980s until the mid-1990s, the most contentious issue in value allocation during biopharma deal negotiations was the cost of capital. Biotechs were small, venture-backed and in constant need of cash infusion, and so their cost of capital was high. By contrast, pharma companies were large, cash-rich and also able to raise funds via debt, and so had a low cost of capital. However, for an R&D alliance between a pharma company and a biotech, the R&D program itself has a cost of capital, raising the question of what this should be in financial projections used in biopharma alliance negotiations. This is important because the higher the cost of capital, the less valuable downstream payments become and, conversely, the lower the cost of capital, the more valuable milestone payments and royalties are in value allocation between the alliance partners.

Until the mid-1990s, pharmas typically argued that a high cost of capital be applied to financial projections during alliance negotiations. This had the effect of minimizing the incentive of biotech companies to negotiate for higher milestones and, especially, royalty payments. In addition, using a high cost of capital for alliance valuation gave credence to the idea that partnering an R&D program was a biotech financing event—like a venture round or public offering, in which biotech’s cost of capital was indeed high—and that upfront and sponsored R&D payments for an R&D program partnered ‘out’ might thereby be made available to support one or more additional R&D programs that remained ‘in’ the biotech.

However, this negotiation dynamic changed in the late 1990s, as codevelopment and regional alliance structures increased the visibility of substantial profits from successful biopharma products.

As a result, the cost of capital in alliance financial projections declined substantially from the 30% or higher that had been used to the mid-teens—much closer to the 10–12% typically used by pharma companies internally. This had a dramatic impact on royalty rates and overall deal size—‘biobucks’—as pharma companies began to offer more one-off payments such as DR milestones and payments for additional indications instead of greater royalty or profit sharing. Importantly, such milestone payments are one-off, unlike royalties or profit splits, which are annuities. DR milestones are also second only to upfront payments in timing and are the most likely to be paid of all downstream payments. So, how have deal participants allocated value via DR milestone payments in biopharma alliances in the past decade?

Trends in milestone payments

Average total DR milestone payment terms have increased across all stages of development at signing over time (Fig. 2). Discovery and phase 1 deals in particular saw substantial increases, with average payments almost doubling in value from the 2009–2013 to the 2014–2018 period.

Looking specifically at the subset of deals involving corporate licensors (Fig. 3) (defined as for-profit companies, therefore excluding the 50 alliances involving research institutions), average total DR milestone payment terms have increased for selected stage alliances in the 2014–2018 period compared with the 2009–2013 period. (There were few deals in the dataset from the 2014-18 period for each of the other three development stages and so these were not analysed.) Discovery-stage alliances had the largest gains in deal payments: Table 1 shows that average total deal size increased fivefold, as did the average upfront cash payment. Total DR milestone payments increased by 83% for recent discovery-stage deals, of which the payment for first approval had the largest gain (from $19 million to $48 million). Total DR milestone payments for preclinical-stage deals increased by 49% between the two periods, with the average phase 3 start payment increasing by 55% (from $9 million to $13 million).

In conclusion, DR milestone payments have increased substantially over the past decade in response to a flattening of the cost of capital used in alliance negotiation. Total DR milestone payments have continued to climb the most in recent years for discovery alliances, with the greatest gains coming at first approval.

What’s behind those billion-dollar biotech deals? Often, a whole lot of hype

Damian Garde, Nov. 28, 2016

It was a good day for UniQure, a Dutch biotech company at work on gene therapies for rare diseases. A big pharma company had just made a billion-dollar investment in its future. Or so the headlines blared.

Eighteen months and two CEOs later, UniQure is laying off about a quarter of its staff, abandoning some of its would-be drugs — and running out of cash.

So what happened to that billion dollars? It never really existed.

Bristol-Myers Squibb paid UniQure just $50 million in cash up front. The rest of the deal came in what’s known in the industry as “biobucks” — akin to lottery tickets that pay out when an experimental drug hits various milestones along the path to commercialization. When a drug fizzles, the money doesn’t materialize.

STAT analyzed nearly 700 biotech licensing deals inked over the past four years and found that biobucks hugely outweigh actual cash on the barrelhead. On average, just 14 percent of the total announced value was paid out upon signing, according to data from EvaluatePharma.

And the up-front payments have dwindled as optimism about the industry has faded. In 2014, when biotech was the toast of Wall Street, about 18 percent of total deal value was paid out in cash on signing. That has dropped to 11 percent in the first nine months of this year, as biotech stocks have slumped.

‘Minimal level of truthfulness’

“You see a billion-dollar deal and think, ‘OK, let me open the press release and see how much it really is,’” said Maxim Jacobs, a biotech analyst at equity research firm Edison. “When you look at a deal [announcement], consider what’s the minimal level of truthfulness that has to be in here for the manager not to be in jail.”

Like any enterprise with something to sell, biotech companies are competing for attention. And a 12-digit deal announcement is more likely to raise eyebrows than an exercise in subtlety. Press release hyperbole can sometimes provide a quick jolt to a company’s stock price, too, by convincing novice investors to buy in.

“There’s something magical about being able to say that number,” said Dr. Frank David, founder of the biotech consultancy Pharmagellan. “Billions, with a B — billions and billions of biobucks.”

But there’s a long-term strategy, as well. By touting a towering sum for one agreement, however speculative, a biotech company might be able to exert some leverage the next time it seeks a partner from big pharma.

“I think people feel it helps increase the value for future deals,” said Alexis Borisy, a partner and Third Rock Ventures, which builds and funds biotech companies. “It’s some form of validation that there is value there, and it’s always easier to build value on top of value.”

Over the summer, for instance, pharma giant Novartis licensed a pair of blood cancer treatments from Xencor in what was widely reported as a $2.4 billion deal. Just 6 percent of that sum came in up-front cash. In April, Allergan struck a biobuck-laden $3.3 billion deal with Heptares Therapeutics in the field of neurological disease. How much cash actually changed hands on signing? Just $125 million.

(A smaller number of deals swing in the opposite direction. In 2013, AstraZeneca paid Moderna Therapeutics $240 million in cash for technology in the earliest stages of development, with another $180 million committed in future milestone payments. A year later, Celgene wrote a then-record $710 million check to Nogra Pharma for a Crohn’s disease drug in development.)

It’s often impossible to know how many biobucks ever actually pay out. Private biotech companies get to pick and choose what they disclose, and publicly traded pharma firms are only required to divulge what their lawyers deem material, which often excludes piddling milestone payments.

In UniQure’s case, the company announced another $15 million payment from Bristol-Myers in August 2015 but hasn’t received a dollar since, according to a spokesperson. The collaboration is still ongoing, however, and UniQure noted in its most recent earnings announcement that at least one project Bristol-Myers has invested in has entered animal studies.

Biobucks don’t exist solely to generate hype. The complex latticework of promises in each biotech deal is the product of a push and pull between the big company buying in and the smaller one selling out, with each trying to minimize its risk.

Rarely do both sides agree on the true value of the drug in question. A small biotech company would prefer a huge sum of cash up front, whereas its pharma collaborator would rather pay up only when it can be sure the project is a winner, said Richard Brudnick, an executive vice president at Biogen in charge of dealmaking. Somewhere in the middle do they meet, assigning values of $100 million here and $200 million there for each milestone the drug hits — a successful clinical trial, for instance, or an FDA approval.

A hidden danger

Such incentives sound like a win-win for both sides. But they can sometimes backfire.

If a biotech company negotiates to receive, say, $250 million when its drug advances from one stage of development to the next, its pharma partner might think twice before moving the project forward based on promising but tentative data. In most deals, such decisions rest with the larger company, leaving biotechs at the whim of their partners.

“One has to think carefully about whether you’ll just end up causing the shelving of your own program,” said Samantha Truex, an advisor at Atlas Ventures with experience doing deals at Biogen and Genzyme. “Those biobucks may have looked impressive for a couple months, but in certain circumstances, massive milestone [payments] could be a disincentive.”

And the more complicated the deal, the harder it is for analysts to make sense of what it’s really worth. Brian Skorney, a biotech analyst at the investment bank Baird, breaks down biobuck deals by multiplying each potential payout by its estimated likelihood of coming to fruition. But the farther away the milestone, the harder it is to parse its odds.

“A lot of us look at some of these preclinical billion-dollar deals and just roll our eyes and say, ‘Well, you’re probably not ever going to materialize any of that,’” Skorney said.

Sources:

Milestone payments in biopharma: negotiating an equitable value allocation (Biopharma Dealmakers, Nature)

Why billion-dollar biotech deals are often just a mirage (statnews.com)